Asymmetric Behavior of Inflation Uncertainty, Unemployment Uncertainty and Economic Growth: Evidence from Pakistan

Macroeconomists devise legitimate consensus that uncertainty of inflation creates economic disorders by distorting price mechanism, deteriorating purchasing power, disturbing investment decisions and creating welfare losses on the part of the economy. This panorama was informally pioneered by Milton Friedman (1977) and then formally by Lawrence Ball (1992) suggesting that inflation raises its associated uncertainty. While this study analyses the nexus between inflation, its associated uncertainty, unemployment uncertainty and real GDP growth using quarterly time series of Pakistan ranging between 1981:01 and 2013:04. This study shows ARMA-EGARCH specification as a measure of uncertainties of both inflation and unemployment. Toda Yamamoto Augmented Granger Causality indicates that causality is uni-directional and the direction is running from inflation to its associated uncertainty i.e., in line with Friedman-Ball Hypothesis. The findings also ratifies Ball’s Hypothesis (1992) that inflation Granger causes unemployment uncertainty. Unemployment uncertainty being the costs of higher inflation therefore deserves equal billing with inflation uncertainty. The finale of this study reports Davis and Kanago’s (1996) regression that uncertainties associated with both inflation and unemployment hampers real GDP growth thus also supports Friedman-Ball (1977, 1992) hypothesis. Since both uncertainties of inflation and unemployment are the cost of higher inflation therefore disturb real GDP growth then and there this study suggests its policy implication that the policymakers must target both variables so that the authorities could cope with uncertain economic environment and can minimize the uncertain economic environment. Supervised:- DR. ATTIYA YASMIN JAVED

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Keywords : Inflation, Unemployment
Supervisor: Attiya Yasmin Javid

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